LI CHUN KIT v. PACIFIC WING SHING AIR DUCT CO LTD AND ANOTHER

HCLA 74/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

LABOUR TRIBUNAL APPEAL NO. 74 OF 2003

(ON APPEAL FROM LBTC 5249 OF 2002)

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J U D G M E N T

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Introduction:

1.  This is an appeal against the decision of the Presiding Officer of the Labour Tribunal of 26 August 2003.  The facts as found by the Presiding Officer are not in dispute.  The sole ground of appeal is that the Presiding Officer erred in law in his interpretation of a document providing for the Claimant’s entitlement to commission.

2.  The Claimant was employed as the sales manager of the two Appellants since July 1997 until the termination of his employment in February 2002.  He filed a claim with the Labour Tribunal for arrears of commission and some other claims, which he subsequently withdrew.  Under the terms of the Claimant’s employment, he was entitled to commission.  It is common ground that prior to 2000, the Claimant’s commission was calculated at the rate of 45% of the total annual commission earned by the Appellants’ sales department.  In a document dated 1 June 1997, called “Sales Department Commission Calculation Method” (the “Commission Document”), commission earned by the sales department was calculated as a percentage of  “annual sales invoice amount” which is defined as “the total amount of sales invoices which have been settled at the end of each financial year.”  The commission after 1 January 2000 was linked to the Appellants’ profits.  There was no dispute as to the commission earned after 1 January 2000.

3.  Before the Presiding Officer, the Claimant contended that prior to 2000, the commission earned by the sales department should be calculated on the basis of the invoiced amount, irrespective whether the invoices had been settled.  The Appellants contended that it should be based on the amount actually settled by the customer.  The Presiding Officer accepted the Claimant’s interpretation and held in paragraph 11 of his Reasons for Decision as follows:

“本席認為，在2000年之前的計算方法，應參考徐先生所簽署的佣金計算方法文件，而該文件上列明‘the annual sales invoice amount is the total amount of the sales invoices which have been settled at the end of each financial year’，本席認為，用以計算佣金的基數，應等於公司的總營業額(turnover)。”

4.  Based on that interpretation of the Commission Document, the Presiding Officer found that additional commission in the amounts of $89,090.03 and $59,532.39 were payable to the Claimant respectively by the 1^st and 2^nd Appellants.  Against that interpretation by the Presiding Officer, the Appellants appeal.

The proper construction of the Commission Document

5.  The issue raised in this appeal is what is the proper construction of the Commission Document.  The applicable principles in construction of a document have been summarised by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 897 at 912-913 as follows: 

“I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v. Simmonds [1971] 1 W.L.R. 1381, 1384-1386 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989, is always sufficiently appreciated.  The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life.  Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded.  The principles may be summarised as follows.

(1)     Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2)     The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include.  Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3)     The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent.  They are admissible only in an action for rectification.  The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life.  The boundaries of this exception are in some respects unclear.  But this is not the occasion on which to explore them.

(4)     The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words.  The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.  The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] A.C. 749.

(5)     The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents.  On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had.  Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna AB [1985] A.C. 191, 201:

         ‘if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.’ ”

6.  In Jumbo King Ltd v Faithful Properties Ltd & Ors [1999] 4 HKC 707, Lord Hoffmann said in delivering his judgment of the Court of Final Appeal at 726-727:

”The construction of a document is not a game with words.  It is an attempt to discover that a reasonable person would have understood the parties to mean.  And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve.  Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well.  Their language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended.  In ordinary life people often express themselves infelicitously without leaving any doubt about what they meant.  Of course in serious utterances such as legal documents, in which people may be supposed to have chosen their words with care, one does not readily accept that they have used the wrong words.  If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other.  The court is not privy to the negotiation of the agreement – evidence of such negotiations is inadmissible – and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession.  Or one of the parties may simply have made a bad bargain.  The only escape from the language is an action for rectification, in which the previous negotiations can be examined.  But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean.  Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail.”

7.  The Commission Document was issued by the Appellants and agreed to by the Claimant as binding between the parties as to how commission earned by the sales department was to be calculated.  Its full text is as follows:

“Sales Department Commission Calculation Method.

Date: 1^st June 1997

The annual sales invoices amount is the total amount of the sales invoices which have been settled at the end of each financial year.

	Annual Sales Invoice Amount	Percentage	Commission
First	$5,000,000.00	1.00%	$  50,000.00
Second	$5,000,000.00	1.50%	$  75,000.00
Third	$5,000,000.00	2.50%	$125,000.00
Fourth	$5,000,000.00	4.00%	$200,000.00
Fifth	$5,000,000.00	6.00%	$300,000.00
		Total	$750,000.00

Thereafter based on the sales invoice amount multiply by 3%

The above commission is for the whole sales department and in between the employee which entitled to belong to the sales department will have a % share of the commission, the % will be stated on individual employment contract.

The calculation method and the percentage rate is subjected to change if the administration and sales department both agreed.”

8.  The Presiding Officer rightly quoted the definition of “annual sales invoice amount” and then opined that the amount to be used for calculating commission is the turnover.  He gave no reason for his interpretation or conclusion.  With respect to the Presiding Officer, his interpretation is wholly inconsistent with the interpretation which could properly be reached by applying the legal principles I referred to above.

9.  The Commission Document is a document which sets out the rate of commission to be earned by the sales department and the calculation method.  All these have been agreed between the Appellant and the sales department.  Looking at the document as a whole, the commission earned is to be calculated on the basis of “annual sales invoice amount.”  The meaning of this phrase is defined in the very first sentence of the document as “the total amount of sales invoices which have been settled at the end of each financial year.”  The construction of this definition turns on the meaning of the word “settled”.  This word has a number of meanings according to The New Shorter Oxford English Dictionary.  In the context of a document of this nature, i.e. one providing for commission based on sales invoice, the word “settle” must mean “close (an account) by a money payment; pay (an account, a bill, etc.)”.  This is the natural and ordinary meaning of the word.  The Appellants who drafted this document must be taken to have chosen this word with care so that the word reflected their intention.  Likewise, the Claimant or the sales department which consented to the terms of the document must be taken to have accepted the terms in the Commission Document on the basis of the natural and ordinary meaning of the word “settle” and that the document reflected the common intention of the Appellants and the Claimant.  It should also be noted that the word “settled” is used in the passive voice and in the present perfect tense, implying that only invoices which have actually been paid would be counted for commission purpose.  Invoices issued but not yet paid by the end of the financial year will not be counted for commission purpose for that financial year.   Thus, in my view, the true construction of the words “annual sales invoice amount” used in the Commission Document means the total amount of sale invoices which been paid by the end of each financial year.  The amount of any sale invoices issued which have not been paid will not be counted for commission purpose even though the sale has been concluded.  Likewise, any amount stated on the invoice which does not require settlement, for example the value of parts and materials provided by the customer, will not be counted for commission purpose.

Conclusion

10.  In my view, the Presiding Officer erred in law in his construction of the Commission Document.  As a result, his finding that the Appellants were liable to the Claimant for additional commission based on his erroneous interpretation of the Commission Document providing for the Claimant’s entitlement to commission cannot stand and must be set aside.  Accordingly, I allow the Appellants’ appeal and set aside the award of Presiding Officer.  The Claimant shall pay the Appellants’ costs of the appeal, to be taxed if not agreed.